Get access

Creditor Rights, Enforcement, and Bank Loans




    Search for more papers by this author
    • Kee-Hong Bae is from the Schulich School of Business at York University. Vidhan K. Goyal is from the Hong Kong University of Science and Technology. We are especially grateful for helpful comments from our referee and associate editor. We also thank Adam Ashcraft, Kalok Chan, Stijn Claessens, Florencio Lopez-de-Silanes, Vojislav Maksimovic, Darius Miller, Marco Pagano, Kwangwoo Park, Gordon Phillips, Rene Stulz, K.C. John Wei; seminar participants at the International Monetary Fund, University of Maryland, Korea University, Queen's University; and participants at the 2004 Georgia Tech International Finance Conference, the 2004 Financial Intermediation Research Society Conference, the 2005 Asia-Pacific Corporate Governance conference, the 2005 CIFRA International Conference on Financial Development and Governance. Vidhan K. Goyal acknowledges HKUST research Grant #DAG02/03.BM22 for research support.


We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.